Prudent Investments for now?

[avidsaver]

I’m new to the site (about a week now), and I’m wondering where you all have your money invested now in anticipation of a coming recession or housing crash. I have a pretty small nest egg. About 60% is in cash (ING Direct), and the remainder is in mutual funds (401k and Roth IRA) or company stock options and employee stock purchase plan.

What do you think?

BTW, I’m going on vacation today for a week, but I’d love to read responses when I get back. Just don’t think I’ve disappeared entirely because I haven’t responded! I’ll also be here for a few more hours.

[powayseller]

This has been covered in length, and 100% cash, with some money in gold is the preferred option now, due to the upcoming recession.

Read the archives, search for key words Fleck (or Fleckenstein), cash or gold or stock market or Zeal (commodities trading service well loved by many of us) or Treasury.

We’ve had many threads about how to hold cash: CDs, Treasury, euros, swiss francs, as many of us are concerned about the falling US dollar, and how much further it might fall when more housing loans go bad and banks and GSEs go under. Nobody here has any answers.

Read the bubble blogger in the link at right, TheBigPicture.

I went 95% cash in March, in anticipation of a stock market correction that I knew I wouldn’t be able to time. The current uerber-bull rally is going to fizzle out soon enough. Just wait for a few more bad housing reports, lender shake-downs, and poor retailer reports, and the stock market is going to start its long climb down. I am expecting the stock market to fall 30% at least over the next year. When we’re in the middle of the recession, maybe next spring, I’ll get back into stocks. I am only speaking for myself.

[avidsaver]

Thanks. I don’t see the bubble blogger link though. I will do the searches you recommend and make some adjustments!

Nevermind — I found the Roubini blog. That’s what you’re referring to, right?

[Daniel]

“…due to the upcoming recession”. Presenting forecast as fact certainly makes an impression on the reader.

[JES]

Powayseller, Do you have plans to get into foreign currency, like the Swiss Franc? I’m interested in learning about the most cost effective way to buy foreign currency. Going to a big bank the best route?

[technovelist]

I’m not powayseller (obviously), but in my opinion for most people the most cost-effective way to get a Swiss franc position is probably to purchase a Swiss franc annuity. These annuities are quite liquid and pay a reasonable interest rate (for Swiss francs investments, anyway). They can also have favorable tax treatment when you start taking the money out if you actually “annuitize” your accumulated account at retirement.

Buying Swiss franc banknotes (i.e., “cash”) is possible, but you will probably find there is a pretty wide spread between the bank’s buying price and their selling price, which makes this a less desirable approach.

[powayseller]

I have no knowledge of how to buy currencies. My cousin works at a large german bank, and when I asked him how to buy euros, he suggested euro bonds.

So were do we buy euro bonds and swiss franc annuities?

Also, what are the considerations for a long-term investor, as far as the economy, that we should also consider? I’m looking for a country with low debt, strong exports, rising GDP, with a good economic policy (not the bubble-blathering fools like Bush and the Fed).

avidsaver – on the piggington home page, the lower right column is titled – other bubble bloggers – That is great stuff, and Barry Ritholtz from The Big Picture is one of the featured bloggers.

[technovelist]

Here is a web page with a general explanation of Swiss annuities, as well as links to a couple of annuity brokers (at the bottom). I’ve personally used JML.

[(former)FormerSanDiegan]

30% cash, 30% real estate, 10% gold, 30% stock

100% anything is speculation.

[powayseller]

My investment advisor, who is rated #1 by Timers Digest, advises 100% cash. Stocks are going down, gold is overpriced, and real estate is going way down.

100% US dollars is risky, so I am spreading it out among various currencies.

I’m curious, why do you think being 100% cash is risky?

I may lose some money to inflation, but only 1-2%. With any of those other investments, I could lose 30-50% easily. I am staying far away from that list. Nothing personal, but that is the list I have been describing on this forum as an avoidance list: sell your home, sell your stocks, and buy 5% gold when the price comes down.

[technovelist]

How do you figure that gold is overpriced? To match the 1980 peak (after inflation, of course), it would have to be over $2000. And the overall economic situation now is MUCH worse than it was then!

Remember, gold is the only money that is always acceptable, no matter what disasters are unfolding. That’s why central banks have held onto so much of it, even while telling us it is a “barbarous relic”.

[powayseller]

quick answer – read Zeal, Chris Johnston; parabolic move and above 200dma, will correct further,wait and buy on dip

[technovelist]

Sorry, I don’t buy it (no pun intended). In my opinion, the risk in waiting for gold to go down to the mid 500’s is bigger than the risk in acquiring at least a partial position now, and then buying more on the dip if it occurs. The move above the 200 dma can also be corrected by the moving average coming up, not only by the price going down.

But of course it’s your money, so you have to make the decision. Just remember that these advisors can be wrong too, and they won’t help you if you get “priced out”.

[LAcrash]

My parents told me that they just put a good chunk of money into a local bank called Premier America Credit Union. Anyone know anything about this bank? Their website shows that they do I/O loans (with a 20% down), and they have a special loan program for those  with "modest incomes" even if they have only 3% to put down, and no PMI needed!  Hmmmm.  Maybe I will need to pull one of those bank-rating reports that Powayseller has mentioned, are those in plain English and comprehensible to an economics/finance layperson like myslef?

[Anonymous]

Avid,

In addition to high quality bonds and euros, you should look in to stocks paying large dividends, large-cap equities in general, and alternative sectors that have been out of the spotlight.

Southern Copper, for example, has a dividend approaching 9%. While I believe we are in a bit of a commodity bubble, I think owning this stock could be very profitable because of the abnormally large dividend. One ETF play I like for this strategy is First Trust Morningstar Dividend Leaders fund (FDL). Morningstar has devised an interesting methodology whereby it allocates funds according to the amount of dividend every public company is paying. So you own nearly every public company in proporation to the size of the dividend. It has a 4-5% yield on average and should outperform the general market especially if it is flat or down.

Poweshares Dynamic Market (PWC) is also an interesting large cap choice. Powershares uses a proprietary model that screens out overvalued components of the S&P 500 so that what is left is what I call the Warren Buffet S&P. The problem with classic indexing (like the S&P 500) is that many of the companies enter the index simply because they are overvalued and their market capitalizations have risen so dramatically (due to speculation or whatever) that they have to be added. The Powershares model actively decreases this effect by overweighting the fundamentally undervalued parts of the index.

Lastly, I would look in to water resources. I think we will hear more and more about the scarcity of water as the world’s population grows. Many of the companies providing water and water services are growing very rapidly. Most importantly, there has been little focus on the sector (unlike oil and gold) and so there is less risk of a major capital flight should we enter a global recession. PHO is one of the best ways to play in the water market.

Best,
Mike

[Anonymous]

Stephan, I agree with your analysis and investment picks. Only one nit — it won’t require billions to clean the mess up (the S&L fiasco cost us $200B, I vaguely remember), it will require trillions.

[PD]

How do you have your cash in Chinese RMB? Where do you have your accounts?

[ybc]

Stephen, impressive. What do you do at your day job? This is all a hobby?

[vcguy_10]

Stephan,
If you think the US will print copious amounts of money to avert a deep recession, that 50% of your portfolio in GRZZX and BEARX (both denominated in dollars) will be toast as the dollar devaluates! BTW, those two funds have expense ratios that are 10 times higher than those of low-cost funds such as those run by Vanguard. VERY expensive funds, and, even worse, denominated in dollars.

As for Au (gold, that is) your other 50%, it has more than doubled in five years. It may be argued that the same excess liquidity that doubled house prices in the US has caused the doubling in gold. Could there be a dotcom-like or RE-like bubble in gold? It’s now a bit over $600, but if you expect lots of money printing and dollar devaluation, and $1000 gold, then you should probably be upwards of 75% in gold.

Thanks for your posting. Whether one agrees with it or not, it is well thought out and thought provoking.

[ybc]

Stephan, Do you have a way to exchange your money back into dollars? Or are you waiting for the yuan to become a floating currency?

[vcguy_10]

ybc: the yuan doesn’t have to float for it to be convertible. You can convert it at the fixed exchange rate. The downside is the bid-ask spread in banks, which will eat a big chunk of your funds every time you get in and out. This spread may be higher than for european currencies.

Once you open a bank account in China, you can wire money to/from your US bank. China being a communist country, there may be added paperwork delaying the process.

[powayseller]

why do you like pho?

[ybc]

Stephan, you must know something that I don’t. As far as I know, once you converted your dollar into Yuan, you can’t just exchange it back to dollar (or any other currency). My parents couldn’t, and I couldn’t (when I travel to China, if I converted some dollars and keep my original receipt, then yes, I can convert back the left-over RMB). That’s why many people go to the black market. That’s why it’s a controlled currency. On my last trip, I did some American collegues favor to exchange dollar for their RMB because they lost their receipts. And I’m pretty sure that if the rule has changed, it’s a big news and I’d know it. It’s easy to exchange into RMB, but not that easy to get out (easier today if you have good connections in China, but not freely).

[Anonymous]

I like pho first off because it appears that it is being heavily accumulated — all the technicals look good. Secondly, I think that this is an underappreciated sector that will be bid up by everyone looking for the next thing once oil falls back. Lastly and most importantly, I believe that the long-term scarcity of potable worldwide will benefit all of the companies held in this fund. I think the downside is rather small because there is no hype in this sector yet.

[ybc]

The best case for gold is that the world needs an alternative reserve currency now that dollar may lose its value over time. US dollar is the dominant reserve currency for many countries, which gives it artificial support on top of what dollar should be worth based on fundmentals.

So gold should be thought as a hedge against the long-term devaluation of US dollar; and maybe also a hedge against increasing geopolitical risks in the world.

[Anonymous]

YBC, I agree with your thoughts and view on gold (and still disagree on your choice of political heroes!).

[powayseller]

I agree w/ you about water. That is the most precious commodity, and I’ve been looking for a good water play.

I hate owning dollars; it makes me very nervous. I really think this banking collapse and govt’ bailout will require so much printing of money, that the dollar will be seriously devalued. With a slowing economy, and the other central banks raising interest rates, the US Treasury will be less competitive. The 5% earned on US Treasuries doesn’t look so good when the ECB is paying 4%. Frankly, I see no hope for the dollar.

If the Fed lowers interest rates, inflation will really get going, and the Treasuries will sell off, as the main reason we’ve had buyers is that the US offers the highest interest rates. Due to our large debt, we’ve got to offer a higher interest rate than the ECB.

BTW, the piggington server problems are really starting to get annoying. Timing out, trouble saving comments due to some unknown character in the post, unable to access, etc. I hope Rich will be able to resolve this.

[SDbear]

“I really think this banking collapse and govt’ bailout will require so much printing of money, that the dollar will be seriously devalued.”

In that case all hard assets including Real estate and stocks will appreciate in dollar value.
Gold is a commodity and usually 60% of world buying in tonnage is bought by jewellers in India. But with the high prices last quater buying by this section has decreased by over 60% YOY. In dollar terms this might be around 30%. In addition to that some European central banks are expected to dump a significant portion of their annual sellable gold into the market before the sept 30 deadline. Gold market actually looks bleak for the next few weeks.
You should look at the gold market objectively like we are looking at the RE market. I’ll put some nos. off the cuff here, but it would be more or less close to the actual nos. Around 5% of annual gold (including mine production, scrap metal conversions and the central bank liquidations) is consumed for industrial applications, 20% for investments, 60% for the jewellery market in India. This no. used to be similar for both tonnage and dollar values until last year. Jewellery consumption in India is actually an indirect investment which will create huge divergence between tonnage and dollar value demand. So there will be some significant upward resistance in tonnage demand as the prices increase. Only 5% of gold will not have a direct effect on demand due to prices (although some indirect effect).
Gold is way more liquid than RE, so can go down much faster. If you are planning for an eventuality of Fed printing more money you are actually better off owning RE than Gold. Only problem with it is that most RE investments are leveraged and increases risk. Even if it is not highly leveraged it has to be a significantly big investment.

[ybc]

sdbear, I agree with your fundmantel analysis on gold. But if dollar gets devalued, foreign governments can’t own US real estate as part of their reserve. The world needs a reserve currency. Euro might take up some, but Gold is another natural choice. That’s the long-term case for Gold.

Right now I think that gold’s price is being helped by a lot of speculative interest. I read that gold index fund itself becomes the marginal demand that pushes up gold prices.

[Wiley]

I’m not too worried about jewelry demand as a fundamental driver of gold. I think investment demand, demand from China/India as they come on line, and the demand from the massive amounts of liquidity being injected by central banks all over the world of 5-8% yoy (including china).

I also like the water stocks. These companies are buying up the water infrastructure of these housing communities essentially becoming utillity companies. SJW is my favorite.

[powayseller]

Wiley, are you concerned about SWJ’s real estate holding company? I am looking for a pure water play without any real estate attached.

“SJW Land Company, a wholly owned subsidiary of SJW Corp., owns and operates parking facilities. SJW Land Company also owns commercial buildings and other undeveloped land primarily in the San Jose metropolitan area, certain properties in the states of Florida, Connecticut and Texas, and a 70% limited partnership interest in 444 West Santa Clara Street, L.P.”

[SDbear]

“… with some money in gold is the preferred option now, due to the upcoming recession.”

Has’nt GOLD done bad during recessions? Only time GOLD goes up is during periods of moderate inflation and high inflation. So if you people are speculating a recession why be in GOLD? I would understand if you are planning for an eventuality of fed printing money like crazy to ward off the recession.

[powayseller]

vrudny, I don’t have the confidence in the renminbi that you have. China’s banks have hidden very effectively a huge amount of bad debt. They are overbuilt, and soon, their factories will sit idle. Then what happens to the banks? I am more worried about the yen than the US dollar. I do not want to buy yen, preferring the currency of a stable established economy, like swiss franc or euro.

Also, does anyone have any idea why Roubini would call gold a “barbaric relic”? I asked him, so maybe he will answer.

[vcguy_10]

I couldn’t help but chuckle when vrudny mentioned having a “friend”… China is a communist country, and there’s no transparency whatsoever. Even Japan (not communist) had a serious problem with obscure and hidden banking practices that were part of the asset bubble bursting there in 1990 that hasn’t recovered yet 16 years later.

As for Roubini’s relic commment, I think he was being sarcastic. I wish he would read what he posts before pushing the ‘submit’ button: all those grammar slips detract from his credibility, not to mention his overbearing tone. I bet his scholarly papers are nothing like that thanks to the peer review process.

I saw your postings in his blog. I think he’s Italian. Not all surnames ending in “-ni” are Persian.

[powayseller]

vrudny, Chinese women are very beautiful, and I am sure your wife is too.

vc_guy, another poster informed us Roubini speaks farsi.

[ybc]

JG — allowing room for differing views, that’s the beauty of democracy, isn’t it? I generally try to keep my mind open. As I said, I am not that interested in politics, but I do care about impacts of policies. And I generally also think about long-term/unanticipated consequences of decisions. So if a politician in action doesn’t bring good policies to the table, then he or she will lose my respect.

There are many very knowledgeable people here, and I’ve learned quite a bit, and I think that it’s a good things that views differ…otherwise it’d be boring.

[powayseller]

Roubini’s blog today regarding my question on gold and whether he speaks farsi. He actually responded to me; I think I’m in heaven…

“Schahrzad: thanks for your continued interesting comments. I say that gold is a barbaric relic as there is a bunch of “gold bug” who believe that all the world’s problem would be solved if we were to go back to a gold standards; these hacks are usually the supply-sider voodoo economics believers who think – against all evidence – that tax cuts increase revenues. So, i am wary of supporting the role of gold. and yes in periods of inflation gold can be an hedge; but so can many other commodities; what is so special about gold? so, i’d rather us get rid of our gold obsession.
best, nouriel ps: btw i speak farsi extremely poorly

Written by Nouriel on 2006-08-31 19:27:44″

[avidsaver]

Just back from vacation. Thanks for all of your input. I have a lot to read and research.

[Author]

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